Prof. Barry Adler

Fall 2002

CONTRACTS

Promisor – breaching party

Promisee – screwed party

  1. Damages for Breach of Contract
  2. THE THREE DAMAGE INTERESTS: EXPECTATION, RELIANCE, RESTITUTION
  3. Reliance — Put promisee back in the position he would have been in had the promise never been made – e.g. put stuff in storage for $700 in preparation for house being painted.
  4. Restitution — Put promisor back in the position he would have been in had the promise never been made – e.g. deposits.
  5. Expectation — [benefit of the bargain] Put promisee in the position he would have been in had the promisor performed – e.g. cost $2000 more for someone else to paint house, could also include $500 for damages. This is the default rule.

a)Efficient Breach – expectation damages induce efficient breach where cost of performance exceeds benefit. Save renegotiation costs.

  1. Nurse v. Barnes– Court awards expectancy damages, but also can see this as reliance + restitution.
  2. Tongish v. Thomas- [sale of seeds w/resale contract] – allows for $10/hw damages based on idea that specific rule governs over general. Looks like court is overcompensating buyer. But recognize that Co-op is Bambino’s agent – Bambino wants protection of price stability. Without this result Tongish will always breach if price rises so Bambino will always overpay.
  3. Restatement §347: Measure of Damages in General — Expectancy
  4. Uniform Commercial Code (97)

a)§1-106 Remedies to be Liberally Administered — general expectancy

b)§2-713 Non-Delivery or Repudiation — market price minus contract price plus incidental damages

c)§2-715 Buyer’s Incidental and Consequential Damages

d)§2-717 Deduction of Damages from the Price

  1. Mitigation – if it is reasonable to wait a day to get your house painted and it reduces total loss than you’re required to do that. Can think of this as part of or limitation on expectation damages.
  1. THREE LIMITATIONS ON DAMAGES
  2. Remoteness of Harm - Forseeability

a)Hadley v. Baxendale (102) — [delivery of crank shaft, stoppage of mill as a result]. Damages must “fairly and reasonably arise naturally from the breach.” Limited Liability rule.

(1)Can contract around this by letting other party know – in advance–result of breach. Then you will pay “insurance premium.”

(2)This rule produces the right amount of precaution not blended precaution treating diamonds like paper.

b)Restatement §351 (120): Defines forseeability as ordinary or special, but known by promisor

c)Morrow v. First Nat’l Bank of Hot Springs (121) — [valuable coins stolen from house, failure to notify that safety-deposit boxes were available]. This is not about forseeability – it is about proportionality and tacit agreement. Bank couldn’t have agreed to pay for insurance payment for SAME cost as normal safety-deposit box.

  1. Uncertainty of Harm

a)Chicago Coliseum Club v. Dempsey (125) — [Dempsey refuses to fight in boxing match] Cannot recover damages that are too speculative – like lost profits (often, though court will try to figure this out). Also denied recovery of damages incurred prior to D’s signing of the contract and those incurred trying to get D to stick to contract after he declared his intent to breach because that is trying to force specific performance.

b)Restatement (139)

(1)§346 Availability of Damages — If no loss or loss not proven, small, fixed sum awarded as nominal damages

(2)§349 Reliance Damages — Expenditures made in preparation minus those that would have been lost with performance

(3)§352 Uncertainty as a Limitation on Damages

c)Mistletoe Express Service v. Locke (143) — [promisee enters into contract for delivery service, purchases vehicles and ramp. Promisee lost money every month open] Reliance damages in the case of a losing contract. Burden on breacher to prove the amount of loss the breachee would have sustained had the contract not been breached. If can prove saved “losses” those $ can be subtracted from breachee’s reliance damages.

d)Anglia TV v. Reed (140) — [Actor calls off contract to star in film] General rule is that P can claim for lost profits or wasted expenditure but not both (Purely speculative profits, however, are never recoverable). Recoverable wasted expenditure not limited to that incurred after D signs contract—differs from Dempsey. Striving for the ideal of expectancy — P is essentially arguing that it would have at least broken even and is entitled to all expenses incurred thus far—goes beyond pure reliance (which would only cover post-signing expenditure).

e)Courts disagree as to whether to award pre-and post-contract expenditures (Anglia) or just post-contact expenditure (Dempsey). But in both Court presumed $0 profits and then used expectation measure.

  1. Avoidability of Harm (Mitigation)

a)Rockingham County v. Luten Bridge Co. (147) — [Agreement to construct a bridge, county calls off contract but builder keeps working] Plaintiff cannot sue for damages that could have been avoided after breach. There is a duty to mitigate damages (ceasing to work). Expenditures after notification will not be included.

(1)Hypo – Contract for $100 to build bridge, expected costs to be $80 prorates evenly throughout building time. Half-way through bridge building payer repudiates the contract. Builder finishes the bridge anyway and ask for $100. How much will builder get? $60 -- $40 in spent costs and $20 in lost profit. Can see this as expectancy damages or can see this as mitigation doctrine.

b)Parker v. 20th Century Fox (152) — [Actress to appear in a film, movie not produced but studio offers her another role, she declines] Limits mitigation damages such that P not required to accept any position substantially different from, or inferior to, the one contracted for in order to mitigate damages. Not always clear whether or not work is inferior, forces courts to calculate imponderables.

(1)Hypo –If movie pays $750,000 at a cost to reputation of $250,000, damages would arguably only be $250,000 (total $1M), so that she is made whole and Fox spend $1 million for a movie rather than $750,000 for nothing. But this makes MacLane have to speculate about being awarded damages – too risky for non-breaching party. Rule – mitigation only applies when costs are clear.

(2)Hypo - Shipper brings perishables to a dock, leaves them there when carrier fails to show. Duty to mitigate means shipper must try and sell.

c)Restatement §350 (163): Avoidability — Damages not njkk recoverable if could have been avoided w/o undue risk, burden, or humiliation. Exception is when he has made reasonable but unsuccessful efforts.

d)Neri v. Retail Marine Corp. (163) — [contract for the sale of a boat, buyer breaches, retailer sells same boat to another buyer]. Was sale to 2nd customer simply mitigation? NO. Theoretically limitless supply of boats, therefore no mitigation. Seller entitled to lost profit on sale together with incidental damages. NOTE there was double-counting of interest.

e)Uniform Commercial Code (168)

(1)§2-706 Seller’s Resale — Statement of Neri rule

(2)§2-708 Non-Acceptance or Repudiation — Expectancy

(3)§2-710 Incidental Damages

(4)§2-718 Liquidation of Damages — No penalty clause

(5)§2-719 (172) Contractual Modification to avoid Hadley rule

  1. EXPRESS DAMAGES PROVISIONS
  2. Liquidated Damages vs. Penalty Clauses

a)Liquidated damages clauses are okay, penalty clauses are not. Risk adverse people would prefer penalty clauses because they assure performance and reduce litigation cost.

b)Test to determine whether LD are enforceable:

(1)At time of contracting liquidated damages is a reasonable estimate (i.e. not too high which often indicates a penalty, courts don’t throw out LD for being too low)

(2)Parties reasonably expect that calculation of actual damages is very difficult or impossible (i.e. no clear market)

c)Ex ante approach used, although ex post results may be used to show ex ante unreasonableness.

Hypo - A agrees to paint B’s house for $10,000 with $150,000 express damages clause. 150,000=probably unreasonable unless clear value to promisee ex ante (i.e. Bill Gates needs to see house). But is ex post Gates never showed up this is further proof of unreasonableness of 150K.

d)Liquidated damages logically precludes mitigation

e)Can see this as LD as discouraging efficient breach

Hypo –Abel, painter would have to spend 12K, market price 11K, contract price 10K, LD provision 5K.

  • Expectancy = 1K and Abel breaches efficiently.
  • Liquidated, Abel will:
  • Perform and lose 2K (1K more than expec.)
  • Negotiate with Baker between 1K and 2K for release (but negotiation is costly)
  • Clearly he won’t pay 5K

f)Kemble (174) — [Comedian refuses to perform, contract contains liquidated damages clause] Since LD were for any breach (no matter how slight) LD seen as non-enforceable penalty clause

g)Wassenaar v. Towne Hotel (176) — [Employment contract contains liquidated damages clause] Employer does not show that ex post damages are significantly different from liquidated damages, therefore LD valid.

h)Restatement (185)

(1)§355 Punitive Damages — Not recoverable for breach unless it is also a tort for which punitive damages are recoverable.

(2)§356 Liquidated Damages and Penalties — Allowed when amount is reasonable proof of loss is difficult.

i)Lake River Corp. v, Carborundum Co, (186) — Posner argues that parties will weigh gains against costs when determining liquidated damages. Refusing to enforce penalty clauses is paternalistic.

j)Hypo - Contractor agrees to build roller coaster (set to open on specific day) for amusement park, park begins to advertise. Without liquidated damages, park will advertise freely since cost would fall on builder. Builder will take a lot of precautions to insure construction on time – and then this raises the contract price. So park bought a coaster that is much more expensive that they wanted. Imagine what owner of both would do (joint wealth maximization) - maximize profits by figuring out what combination of advertising/construction is wisest given the revenue that would come in. Well-designed LD clauses can do just that.

  1. Other Remedies and Causes of Action
  2. SPECIFIC PERFORMANCE AND INJUNCTIONS
  3. Specific performance as alternative to expectancy damages, the exception rather than the rule – used for land or unique personal property. Not granted for ordinary personal property or services.

a)NOTE there is a trivial investment in seller’s performance (not making them paint a house, just returning item)

  1. Contracts for Land

a)Loveless v. Diehl (217) — [Purchase and resale of land, similar to Tongish] Specific performance because contract for land, regardless of further contractual dealings.

  1. Contracts for Goods

a)Cumbest (223) — [Sale of a unique stereo, assembled over a long period of time with pieces that cannot easily be replaced] Specific performance because item is very sentimental and cannot be replaced – personal property needs to be examined for its uniqueness.

(1)Normally SP is bad cause want efficient breach – with unique property that isn’t a problem because it there is rarely EB with unique items ?WHY?

b)Scholl v. Hartzell (226) — [Sale for collector’s item Corvette] Not unique, and sufficient relief exists outside of specific performance.

c)Sedmak v.Charlie’s Chevrolet (229) — [Sale of Indy 500 pace car, limited edition, special order car] Basically, same as Cumbest, unique item.

d)UCC §2-716 (233) Buyer’s Right to Specific Performance or Replevin

  1. Contracts for Personal Services

a)Problems with freedom, enforceability, and discouraging efficient breach where there is a “more profitable” pursuit

b)Lumley (240) — [Contract for opera singer to perform exclusively at specific opera house]Affirmative pledges (I will sing for you on Tues.)are NOT enforceable. Negative pledges (I won’t sing for anyone else on Tuesday) are OK.Acceptable today because there is no debtor’s prison.

c)Rule about negative pledges:

(1)Must be reasonable to protect business interest re competition not designed to compel performance (but for a poor person with limited job opps this might be same thing)

(2)Must be limited in time and scope

d)Ford v. Jermon (245) — [Facts similar to Lumley, except American instead of English] Early American criticism of Lumley. If specific performance not allowable, courts can’t substitute indirect compulsion.

e)Duff v. Russell (247) — [Contract for a singer who refused to perform in an opera] Courts implied a negative stipulation and enforced it.

  1. RESTITUTION — DAMAGE INTEREST AND CAUSE OF ACTION
  2. Restitution — Situations where courts will use restitution (not expectancy) to get parties to where they were before they contracted so as to prevent unjust enrichment.
  3. Restitution for Breach of Contract

a)Bush v. Canfield (279) — [Canfield sells wheat to Bush for 14K, w/ 5K deposit. Market price falls to 11K, Canfield doesn’t deliver.] Bush wants 5K – restitution, Canfield: “I saved you 3K by not performing – so I only owe 2K.” Bush wins - Breaching party cannot sue “on the contract” for expectation damages. Damages are based on value at the scheduled time and place of delivery - expectancy damages are not used.

Hypo - Abel is plumber, earns $20/period; plumbers flood market and value drops to $5/period. Abel also an electrician and could earn $15/period, but contractor doesn’t know that. If Abel worked as an electrician, society will be $10 better off, but under Bush, Abel will keep the $20 contract. If Abel could breach and sue, she could charge contractor for the $15 she saves him and work as an electrician, thus capturing the entire $10 surplus and leaving the contractor no worse off.

(1)Can see plumber hypo as problem with Bush. However, w/o Bush there is a race to breach: If either party could find out that breach is efficient race to breach first & get the $10.

b)Restatement (287)

(1)§371 Measure of Restitution Interest

(2)§373 Restitution When Other Party is in Breach

  1. Restitution to the Party in Breach

a)Britton v. Turner (288) — [Laborer agrees to work for a year, then quits after partial performance and sues for payment for work done.] Plaintiff is entitled to restitution for any work done, minus the cost of completion and any other damages. Plaintiff cannot recover more than the original contract price, otherwise breach is being rewarded. Essentially expectancy damages, since non-breaching party is getting exactly what he would have received had the contract been performed. But law is: breaching party can sue for restitution, just not expectation.

Hypo - Laborer agrees to work for $30/quarter for 4 quarters right before value increases to $50/quarter. Laborer quits after 3 quarters. Can see damages as $150, $130 OR $70 (since cannot exceed contract price). But $70 is restitution AND expectancy (if breacher could sue).

b)After Bush and Britton the moral is: breaching party can sue but cannot sue for negative damages.

  1. Restitution and “Quasi-Contract”

a)Quasi-Contract — Contract implied in law, when there is no possibility for negotiation

b)Cotnam v. Wisdom (298) — [Surgeon finds unconscious, injured party in street, attempts to save his life but does not succeed] Plaintiff may recover, in quasi-contract, the reasonable market value of his services even if services were ultimately worthless since patient died. In emergencies assumption is that person would have contracted for the care had he been able.

c)Hypo - Abel notices house next door in dire need of retaining wall, neighbor is not home so Abel fixes wall without permission. Court would assume quasi-contract and may award full damages (supplies and labor) depending on nature of relationship between neighbors.

d)Hypo - Neighbor is now home, Abel asks if neighbor wants his wall fixed, and neighbor replies affirmatively. Court now less likely to award labor, since it appears to be a gift between neighbors. This isn’t quasi-contract issue – it is contract with implied terms.

e)Martin v. Little Brown (303) — [Reader informs publisher of third party plagiarism, then expects compensation] Where there is ample time and contact for compensation to be contracted for in exchange for work, absence of such terms (like price) is evidence that the terms did not exist. It is assumed that reader’s actions are therefore a gift. Courts will not create quasi-contracts unless necessary.

  1. The Doctrine of Consideration — Promises are not enforceable unless supported by consideration – a bargained for exchange. Goal is not to bind people for outrafeous cotracts. However BA thinks it unclear why bargained for exchange is necessary for a contract (though clearly it is sufficient).
  2. THE BARGAIN THEORY OF CONSIDERATION - Distinguishing Bargains from Gratuitous Promises

a)Johnson v. Otterbein (655) — [Donor agrees to give school money if they use it to pay back debt, then rescinds donation]. Court will not enforce promise because there is no exchange. Even though school must use money to pay back debt, donor did not extract any benefit from the school. Outcome would be different if school had to pledge other funds, rename building OR commits to pay down debt greater than amount of donation.

(1)No consideration for giving you $150 in exchange for $50 back in purple envelope, assumption that envelope has no value.

b)Hamer v. Sidway (658) — [Nephew agrees to give up drinking in exchange for $5,000 from uncle] There is consideration (once nephew performed) because nephew actually had to change his actions – doesn’t matter that uncle didn’t get financial benefit.

c)Restatement (666)

(1)§24 Offer Defined — Must be element of exchange

(2)§71 Requirement of Exchange — Must be bargain, exchange or promises. Recipient and nature aren’t strictly defined.

(3)§81 Consideration as Motive — Does not have to be direct

  1. CONTRACT MODFICATION & THE PREEXISTING DUTY RULE – What happens when you modify a contract?
  2. Stilk v. Myrick (687) — [Seamen seek higher pay from captain while at sea because of desertion of crew members, captain has no choice but to agree] NO consideration – sailors were required to do the work anyway (extra work=implicit term re emergencies – different if employer caused extra). Cannot have a bargained for exchange for something you are already obligated to do. Giving up right to breach not seen as consideration.
  3. Alaska Packers Ass’n (689) — [Fishermen want more money for work agreed to because nets are not serviceable, captain has no choice] Same as Stilk. Seamen argue that good nets were part of contract, but court found nets were not faulty. If nets were below contracted for standard, court could have found sufficient consideration. Courts use consideration argument as excuse for disallowing coercion or extortion.
  4. Brian Construction (692) — [Builder agrees to construct a building, then discovers additional debris that needs to be removed, contract for additional work] Court finds valid consideration. Why is this case different that Stily and AK?

a)Court says: the rubble wasn’t included in the original contract so it was “additional work” – thus true consideration.